## Shock Therapy! What Role for Thai Monetary Policy?

_IMF Working Papers, November 8, 2012_

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## Bibliographic details
- Authors: Harun Alp, Selim A Elekdag
- Published: November 8, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475542851.001

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### Overview and research question
- Timeframe analyzed: 2008–2011.
- Major shocks endured by Thailand during 2008–2011: the global financial crisis, the Japanese earthquake, and the Thai floods of 2011.
- Central research question: If an inflation targeting framework underpinned by a flexible exchange rate regime had not been in place, how would the economic contractions associated with these shocks have differed?
- Monetary policy stance observed: consistent with an inflation targeting framework, the Bank of Thailand (BOT) let the exchange rate depreciate and cut interest rates (to, for example, a historically low level of 1¼ percent by mid-2009).

### Methodology
- Analytical approach: counterfactual simulations based on an estimated structural model.
- Estimation and model features referenced in the work: Bayesian estimation, DSGE model, open economy considerations, financial accelerator mechanisms.
- Counterfactual exercise: simulates paths of real GDP and other macroeconomic variables under alternative monetary policy / exchange rate arrangements to isolate the contribution of countercyclical monetary policy and exchange rate flexibility.

### Key findings and statistics
- Quantified contribution: Countercyclical monetary policy and exchange rate flexibility added up to a total of 4 percentage points to real GDP growth during periods when Thailand had to weather the three major shocks.
- Specific policy action highlighted: interest rates were cut to a historically low level of 1¼ percent by mid-2009.
- Page length: 48 pages.
- Working Paper series: Working Paper No. 2012/269, Issue 269, Volume 2012.
- DOI: https://doi.org/10.5089/9781475542851.001

### Analysis and interpretation
- Role of inflation targeting with flexible exchange rate: The combination of inflation targeting and exchange rate flexibility is presented as having a cushioning effect during large external and domestic shocks via allowance for exchange rate depreciation and countercyclical interest rate reductions.
- Mechanisms emphasized: exchange rate depreciation and interest rate cuts acted jointly to mitigate the severity of output contractions associated with the three shocks in 2008–2011.
- Relevance: findings pertain to emerging market monetary policy design under large external shocks and domestic disasters.

### Implications for policy and practice
- Empirical support for preserving room for countercyclical monetary policy in emerging market economies facing large shocks.
- Importance of exchange rate flexibility as part of an inflation targeting framework to absorb external and domestic shocks.
- Policy-makers in similar settings may consider the welfare-enhancing role of allowing exchange rate depreciation and using interest rate cuts during episodes of large adverse shocks, as illustrated by the Thai experience in 2008–2011.

*Source: IMF Working Paper "Shock Therapy! What Role for Thai Monetary Policy?" by Harun Alp and Selim A Elekdag (Working Paper No. 2012/269).*

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